Mayor Ben McAdams talks about his county's pioneering effort - the nation's first - to finance preschool with private investment.

In Salt Lake County, providers of a high-quality preschool program get paid only if they make the grade.

In 2013, Utah’s Salt Lake County launched the country’s first-ever effort to finance public preschool education with “social impact bonds.” Under this initiative, Goldman Sachs and J.B. Pritzker committed to lend $7 million over eight years to the United Way of Salt Lake to expand a high quality public preschool program for “at-risk” children in Granite School District. Salt Lake County and the State of Utah will repay the loan (with 5 percent interest) only if the program meets agreed-upon metrics for “success” – such as whether students avoid placement in special education.

We interviewed Salt Lake County Mayor Ben McAdams, who championed the creation of this effort and now seeks to expand it to other county social services. McAdams belongs to NewDEAL, a network of “pro-growth progressive” state and local elected officials and a strategic partner of Republic 3.0.

R3.0:Why early childhood education and why this particular program?

McAdams: This started with a pilot program of high quality preschool for roughly 60 kids. These kids are now entering sixth grade and are performing at grade level. The cohort that did not receive a high quality preschool education is significantly below grade level.

So with very minimal investment up front, we’ve eliminated the achievement gap. We saw an opportunity here not only for the measurable impacts of the program but also government cost savings at the back end.

R3.0: What kind of cost savings?

“We calculated that for every dollar we invest in preschool, that’s $14 in tax savings on the back end to county government.”

McAdams: Special education costs about $2,600 per child per year. And our data has shown that when these kids enter special education, they are likely to stay there. [We also found that] if a child enters special education, they are more likely to enter a juvenile justice program or use a gang or substance abuse intervention. We calculated that for every dollar we invest in preschool, that’s $14 in tax savings on the back end to county government. That’s after the immediate tax savings from special education to the state.

R3.0: By comparison, how much does preschool cost per child?

McAdams: It’s about $2000 per child upfront. These early interventions are pretty cheap. You don’t need an expensive trained therapist or a Ph.d. You just need someone who can interact with children.

Many [at-risk] kids do not have learning disabilities, and there’s no reason they should be in expensive special ed interventions and programs. The only reason they’re there is because they started kindergarten with a vocabulary of 500 words instead of 1,000 and because they started kindergarten without the ability to socialize in a group setting or interact with adults. Those are pretty easy problems to fix if you intervene when a child is three or four years old.

R3.0: It’s obvious what the children are getting out of it and what the county is getting out of this investment, but if this is not intended as philanthropy, how do Goldman and JB Pritzker benefit?

McAdams: I think Goldman would be willing to do this as a charity, but we intentionally structured this as an arms-length transaction. Our pilot program now has 600 kids. If we’re going to have the ability to get this to scale, where every child who needs it and wants it can receive it, we’re looking at a pool of 60,000 to 100,000 kids. A charity can probably handle 600 kids, but not 100,000 kids, and we needed to find a way where we could attract non-charity dollars.

“We want the ‘pay for success’ model to be not only for Salt Lake County but throughout the nation. We want to get it to the point where you could have a marketable investment that could attract private sector dollars for solving complex government problems in a more efficient way.”

So the first benefit to Goldman is that they have [Community Reinvestment Act (CRA)] credits that they need to invest. But there’s also a return on investment – an interest rate that we will pay on success.

We want the “pay for success” model to be not only for Salt Lake County but throughout the nation. We want to get it to the point where you could have a marketable investment that could attract private sector dollars for solving complex government problems in a more efficient way.

R3.0: That’s intriguing. Are you imagining someday an “exchange” for social impact bonds? How big a market is there for this type of investment?

McAdams: We’ve had a lot of interest in investing in our programs, and we’ve been laying the groundwork for some additional social impact bonds in the area of recidivism and homeless services.

Before serving in elected office, I was a bond attorney in the private sector and worked on Wall Street doing work with finance. I intuitively understand this kind of approach. This is also not new to government. We do it all the time with redevelopment projects for brownfields.

When you’re redeveloping a brownfield, you know that if you can find $1 million for environmental remediation, development will follow – which means more revenue from taxes. And that’s a bondable revenue stream. You can finance against a future tax increment [i.e. future gains in taxes] with a “tax increment” financing bond to pay for the remediation.

[Social impact bonds] are really the same thing in the area of human services. You’re looking at accelerating future cost savings into the present and using that to break the cycle of not being able to afford an ounce of prevention because we’re financially strapped paying for a pound of cure.

We know that early education is better than special ed, but I can’t propose to zero out our special education budget and spend it on early education because I’ve got a cohort that needs special education this year and the next year and the next year. We had to find new revenue to break the cycle of funding the pound of cure so we can afford the ounce of prevention. And what I’ve found is that there’s not the political will to cut existing programs or to raise taxes to generate the new revenue we want.

It’s the same thing in recidivism. We know that if we can invest in mental health and substance abuse programs, we can avoid the expense of jail. But we can’t close a jail to fund behavioral health programs today. So again we’re in a scenario of having to fund an ounce of prevention and a pound of cure.

R3.0: What are the broader implications of this approach?

McAdams: It’s a cliché, but the seeds that are being planted here are the ability to reinvent how government works. People are tired of the debate between the people who say we need more programs and others say we need less. Where we all agree is that we need to look for ways for government to spend money more efficiently and more effectively.

“People are tired of the debate between the people who say we need more programs and others say we need less. Where we all agree is that we need to look for ways for government to spend money more efficiently and more effectively.”

Government in many ways is the backstop for the failures of the community. When there’s a failure in family or educational circumstances, and you end up with an individual who’s on the streets, homeless, or committing crime or in our jails, those are expenditures no one else is going to pay but government. We accept the fact that we are the payor for failure.

I want to break that mold and be on the front end of paying to avoid failure and to pay for success. Rather than paying for special education or juvenile justice, I’d rather invest in early education and avoid those subsequent dominoes from falling.

What I also like about this approach is that it puts government in the position of quantifying what outcomes we want and placing a value on the outcome. When I won my election a year ago, I didn’t become an expert on early education. I know that early education is important and that early education will avoid some social ills that will follow from failure in the school system, but I’m not qualified to pick what program or what approach is the best.

“Government …. is the backstop for the failures of the community. I want to break that mold and be on the front end of paying to avoid failure and to pay for success.”

With this, we actually go out to experts, whether they’re for-profit providers or private sector providers, charity providers and say, “here’s the outcome we want, and here’s the value we place on that outcome,” and we let the market – whether the non-profit market or the for-profit market – find a way to achieve the results we’re seeking, and I as a politician am not in the business of picking one program over another.

The other thing that’s intriguing about this is the way that we’re getting bipartisan support. When I pitched this to our council – we have five Republicans and four Democrats– we got unanimous support from them because they saw the ability to focus our government expenditures to really have an impact on human lives.

Utah is really a very conservative state. Our legislature is 80 percent Republican and 20 percent Democrat. The legislation at the state level was carried by one of the most conservative members of our legislature who’s talking about this as fiscally responsible. I think people are tired of the stale debate between Republicans and Democrats and more versus less, and what we found here is a common ground of not more or less but what’s better.